Big-name
funds pile into real estate debt as banks retreat
Some
of the world’s largest investors are making deeper inroads into lending to
commercial property, as they snap up market share from retreating banks and bet
on an end to the sharp drops in real estate prices. U.S. fund firms PGIM,
LaSalle and Nuveen, Canada’s Brookfield (BN.TO), opens new tab and QuadReal,
Britain’s M&G (MNG.L), opens new tab, Schroders (SDR.L), opens new tab and
Aviva (AV.L), opens new tab, and France’s AXA (AXAF.PA), opens new tab all told
Reuters they plan to increase their credit exposure to property. Most are
focusing on lending to logistics, data centres, multi-family rentals and the
high-end office market. The office sector more broadly continues to struggle,
deterring funds.
“If
I look at our strongest bet currently, it’s probably real estate debt,”
said Isabelle Scemama, who heads up AXA’s 183
billion euro ($198 billion) alternative investments arm.
LaSalle Investment Management, which manages $89 billion globally, said it was
targeting growing its real estate debt investments by 40% to around $7.6
billion over two years, including in distribution, hospitality and student
housing. Betting on real estate debt is not for the faint-hearted. The global
commercial property industry, in particular offices, is still in the grip of
its biggest slump since the 2007-9 financial crisis. But alternative lenders
believe the worst may have passed and they can generate attractive returns as
valuations recover.
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“Historically
through real estate cycles, you would find that generally loans made at the
bottom of the cycle… tend to have the lowest delinquency rates and the
highest spreads,” said Jack Gay, global head of debt at Nuveen. Stricter
capital rules for banks – including new international standards dubbed the
‘Basel Endgame’ – and U.S. regional bank failures have opened the market
further, fund firms said. “The challenges faced by the banks have really
led to a decrease in direct (loan) originations for commercial real
estate,” said Nailah Flake, managing partner in Brookfield’s Real Estate
Group, which sees opportunities to lend more. Private equity firms are also
weighing in. Apollo Global Management launched its first dedicated European
real estate debt fund targeting 1 billion euros this year, a source familiar
with the matter said.
The
fund management arms of major banks are also targeting the market.
Goldman Sachs Asset Management said on Monday it had closed its largest real
estate credit fund to date, with over $7 billion of lending capacity, including
some of the firm’s own capital and leverage. In Britain, non-bank lenders
accounted for 41% of real estate loans in 2023, more than doubling from 19%
just nine years earlier, according to Bayes Business School data, which also
showed that new commercial property lending in Britain reached a decade-low. Across
continental Europe, the proportion has also steadily grown to 20-30%, Bayes
said.
The
growing role of investment funds in lending – known as ‘shadow banking’ – is
worrying regulators because of default and contagion risks. Reporting
requirements for private funds are also softer than for banks, meaning less
transparency. European Central Bank Vice-President Luis de Guindos said in
March that the exposure of non-banks to commercial real estate was one of the
main risks to financial stability in the region. “I do find it quite
worrying that (invested) pension money is affected and funds can do whatever
they want and it goes under the radar,” said Bayes senior research fellow
Nicole Lux.
